Why Startups Fail
I know there are several readers who dedicate their professional and personal lives to this issue. E-Commerce News has an article about this issue www.ecommercetimes.com/rsstory/58813.html. Not much new in the story for most of us but it’s always a good reminder.
A survey done by the U.S. Commerce Department stated that of every 10 small businesses, seven will survive their first year, three will still be going after three years and only two will remain after five years. These are quite startling numbers and really beg the question: “Why do startups fail?”
The article goes on to say that the three main reasons startups fail is Lack of Capital, a Bad Business Model or a Bad Business Plan. I think a key element left out of this article and many like it is Poor Execution. I’ve seen many businesses fail that have all three of those but after years of fighting fail because their execution wasn’t there.
Hmmm. For the most up to date stats, look at http://www.sba.gov/advo (check FAQs)
To be blunt, let me chastise you for using the term “failure” - the majority of business exits are voluntary - very few depart via acquisition or by bankruptcy. About half of businesses close with positive cashflow their last month.
We notice the crash-and-burns, but most businesses actually do pretty well. But let me praise for the focus on execution!
The latest rigorous study says that 2/3 survive the first 2 years with 44% surviving four years. YMMV across industries (don’t open a pizza place, ‘k? Try manufacturing instead…) YYMV also varies across communities - yes, the right kind of supporting ecosystem does matter.
The NFIB paints an even better picture. (www.nfib.org) For example, after 10 years, about 1 in 4 survive. (And the data about half of exits leaving with cashflow.)
There are a couple of things to keep in mind with all these numbers. In particular, is it a “failure” if I close my business with my debts paid? And I learned some valuable lessons for the future? (And *others* learned from my experience?) Google “real options thinking”…
It’s not a “failure” if you think of it as an experiment. “Failing forward” need not be a rationalization.
OK, on to the reasons for exiting - I go back to Dun & Bradstreet’s annual analysis - businesses exit because:
1) bad management [whatever that means?]
2) under-capitalized
3) #1 & #2 are really the same thing (LOL)
Instead, let’s look at the *positive* predictors at the firm level -
1) having employees is a plus
2) a significant growth rate is very
good (gazelles are actually less risky)
3) good advice - strong support system that you actually listen to
4) personal resilience coupled with willingness & ability to learn. (The world changes. So should you.)
5) obsession with customers
5a) obsession with all stakeholders - “successful entrepreneurs pay themselves last” is still the golden rule.
6) obsession with execution - see the Guy Kawasaki column I linked in ‘Recent Bookmarks’.
Great entrepreneurs can make a pedestrian business model work (or find a better one); even a decent entrepreneur may not be able to pull off even a terrific biz model - remember the world changes and competitors are always at your door (or what keeps VCs up at night…) So be a great entrepreneur, ok?
The predictors at the community (ecosystem) level are mostly politically incorrect (e.g., K-12 education spending is a big plus; university spending is actually *negatively* correlated, LOL) so I’ll hit ’submit’ now. If anyone wants to hear more, just holler. I’ve got a detailed review; you can also surf over to http://www.ssti.org for their best practices analyses.
And read Tac’s article at http://www.iqidaho.com
Norris,
The problem is that people fear failure and anything we fear we consider bad. Therefore failure must be bad. I don’t think there’s anything wrong with failure. I think every entrep should fail a few times, it’s better than any advice anyone can give you and if you learn from it then you’ll be an even better business person. If you don’t learn from it that’s the worst thing that can happen.
And yes, if you have to quit, with or without cash flow, and it’s not what you want to do, then I consider that a failure.
Yes, it is NOT failure - if it ultimately leads to success. That’s a very tough mindset to cultivate. The problem with “failure” is really about… Fear.
Research now shows there are two tipping points as ventures evolve - two “Rubicons” for entrepreneurs to cross. The first is moving from the “thinking about it” stage to actually taking significant, visible, concrete steps to start (”nascency”). The harder tipping point to reach is between nascency (”working on it”) and actually pulling the trigger (”launch”). We have a huge database of nascent entrepreneurs -some of them have been nascent for up to 90 months, many of whom are still legitimately trying. Some of them clearly see barriers that you & I would not, but to them.. well, those barriers are real. (Some even fear success, btw!) When we can understand what they fear… then we can help them.
Consider this “failure” - a lovely profitable business that could easily have grown into a significant business that creates wealth & jobs - and maximizes its value prop to customers. But instead the founder(s) choose to have a nice business. Nothing wrong with that per se, but society loses if you don’t grow.. You once called that the “owner mentality” - we have plenty of that in Idaho. What we *desperately* need are people who want to grow businesses. And you have to believe that many of those “owners” see barriers that make them fear becoming “builders.”
How can we help them?